Recent rupee movements warrant attention but not overreaction, according to expert analysis. Despite sharp rises in energy prices, economists expect India's current account deficit in FY27 to settle at around 2-2.5% of GDP, which is manageable by historical standards. The Reserve Bank of India holds foreign exchange reserves of around $580 billion net of forward foreign currency sales, providing meaningful buffers for policy intervention.
The rupee has been weighed down by negative sentiment across FY25 and FY26, with the RBI selling $192 billion of foreign exchange in spot and forward markets. However, India's 'core' balance of payments deficit, including current account deficit, net foreign direct investment, and net equity foreign portfolio investment, was only around $80 billion. This means approximately $112 billion of RBI foreign exchange sales supported additional hedging and speculative demand for foreign currency rather than addressing the core deficit.
Net external outflows drained deposits and liquidity from the banking system, but policy rates were cut by 125 basis points since early 2025 to 5.25% despite inflation moderating. Simultaneously, the RBI injected enormous durable liquidity through large government bond purchases, with ₹8.8 trillion in net bond purchases in FY26 alone, representing 85% of net Central government borrowing. This helped refill the banking system while keeping rates low, but money continued leaking out, leaving banks still seeking durable deposits.
Lower interest rates worsened the external imbalance through three key mechanisms. Narrower interest rate differentials between the rupee and US dollar made it harder to attract foreign debt flows, while persistently low post-tax interest income pushed domestic investors toward equities. The India-US 10-year yield spread compressed to a low 1.5-2.5 percentage points, with one-year dollar-rupee forward premia falling to historically low 1.5-2.5% during much of 2024 and 2025. This enabled hedgers and speculators to buy dollar one-year forward against the rupee by just paying 2% over the spot rate.
India's households have undergone significant financial transformation, with their role as major contributors to economic growth and capital requirements becoming increasingly complex. In 2024-25, households' share in real GDP reached 56.5% through private final consumption expenditure, while their financial position as both lenders and borrowers has evolved substantially. Net financial savings declined to a multi-decade low of 5% in 2022-23, driven by a 78% growth in household liabilities, before recovering to around 6% in 2024-25. The shift from traditional deposit-based savings to diversified market instruments has accelerated, with savings in shares and debentures rising from 6% to 15% of total household financial savings.
